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Costs are expected to rise further over the next three to five years. As a result, CIOs are finding it difficult to find cash to invest in innovative IT projects to grow their business, the report claims, based on interviews with a panel of CIOs from leading financial firms and a survey of 50 financial services CIOs.

Click here to download the full report "Compliance versus innovation".

"What they do tends to be tactical. They end up spending the money they have for that year on compliance rather than on long-term strategic investments," said David Upton associate director of Xantus.

The cost of compliance

96% of CIOs have seen spending on regulatory compliance increase over the past three years

84% expect the cost of compliance to increase over the next three to five years.

43% said their compliance budget had increased by a quarter over the last three years.

24% reported their compliance budget increased by more than 50%.

But an increasing number of CIOs are using compliance projects as tools for introducing innovative IT platforms, the research shows.

CIOs in larger firms, with IT change budgets of over £5m, claimed that regulatory change offered the opportunity for innovation. And three quarters of larger firms said they expected to make a return from compliance work.

Jonathan Kennedy, head of IT service delivery at Northern Rock, said that with careful planning, financial services companies can use regulation to drive IT changes to grow the business.

"It is possible to include business benefits in regulatory projects - and vice versa. You must look at the portfolio of work that already exists, which means planning is essential," he said.

The research suggests that the most successful IT departments are able to differentiate between hard and fast requirements and guidance that they can implement in a more flexible way.

"The focus should be on outcomes, not on literal interpretation - on how we achieve what they are trying to get us to do," said Peter Stafford, director of technology services at Nationwide.

Upton advises CIOs to work closely with their compliance teams to understand the impact regulation will have on their organisations.

"There are certainly CIOs that are ahead of the curve. They are working with compliance people and asking 'does that give us an opportunity to innovate?'."

For example, compliance regulations that require greater accuracy and confidentiality for customer data can present an opportunity to introduce more effective data mining technology, which could lead to higher sales and new channels to market.

"CIOs have to work with their own compliance teams. Don't sit at a distance from them. Go and embrace them," he said.

How to tackle regulatory compliance and still have money to innovate

Develop a clear understanding of what financial services regulations means for CIOs and their teams.

Ensure there is a healthy dialogue between compliance teams, regulators and business sponsors.

Create a roadmap setting out what an effective IT landscape looks like, with regulation considered as part of all system and infrastructure change initiatives.

Develop tight and focused portfolio management to ensure that any change effort is directed for maximum benefit.

Develop effective business cases before moving into development.

Ensure there are rigorous benefits management throughout the programme.

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